Transmission of distress in a bank credit network
This addresses the problem of systemic financial risk transmission for policymakers and banks, but it is incremental as it applies existing simulation methods to a specific crisis context.
The study tackled the risk of bank defaults in a credit network during the European sovereign debt crisis by developing a computer simulation model, and found that factors like network heterogeneity, equity capital ratios, and capital surcharges on big banks significantly impact the number of defaults, with simulation experiments quantifying these effects.
The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer simulation model to analyze the risk of insolvency of banks and defaults in a bank credit network. Simulation experiments reproduce the knock-on default, and quantify the impact which is imposed on the number of bank defaults by heterogeneity of the bank credit network, the equity capital ratio of banks, and the capital surcharge on big banks.